iShares US Treasury Bond ETF

GOVT

Market cap $28.4B

I maintain a hold rating on GOVT, as lower rates and less yield squeeze make it less compelling than a quarter ago. GOVT offers low-cost, highly liquid access to the full US Treasury curve, with a 4.05% yield to maturity and moderate duration risk. Despite weak price momentum and seasonal headwinds, the current yield provides more cushion against interest rate rises than in prior years.

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The iShares U.S. Treasury Bond ETF (GOVT) offers low-cost exposure to U.S. Treasury bonds with a current yield of over 4% and a duration of 5.8. With U.S. economic uncertainty and potential recession, GOVT ETF is appealing as a safe haven, especially given recent equity market volatility and declining consumer confidence. Tariff uncertainties and potential inflation spikes make GOVT ETF a prudent choice, with expected Fed cuts and regulatory reforms potentially supporting long-term U.S. Treasury demand.

Tariffs aren't everything. We believe the U.S. is in late cycle growth and that isolated events such as an intensifying trade war merely accelerates a hard-ish landing argument. A myriad of reasons could explain the recent treasury bond performance-to-recession outlook decoupling. We maintain that the iShares U.S. Treasury Bond ETF can protect against risk in the longer term. Our outlook includes 10-year yields falling below 3% within the next 12 months, GOVT might benefit from such a scenario if it increases its effective duration while maintaining hybrid exposure.

The iShares U.S. Treasury Bond ETF offers low expense ratios and zero credit risk, but its duration is high. Expectations of inflation are high, a harbinger for higher inflation, reflective of aggregate decision making in anticipation of tariffs. Other parts of the US' current policy agenda are also additional sources of inflation.

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GOVT offers broad exposure to Treasuries with low interest rate risk and at a low expense ratio of 0.05%. The ETF's performance is consistent with market reactions to the pandemic and the Fed's policies, making forward-looking assessments easier. Despite potential rate cuts, I expect a stable yield due to strong economic conditions, persistent inflation, and a currently cautious Fed.

Expectations of Fed rate cuts have been rising lately due to continued signs of cooling inflation.

The ECB cut rates by 25bp as widely anticipated, but a slightly hawkish tilt bear flattened the EUR curve, which in our view remains priced aggressively. In the US, as the markets head towards the Fed's first rate cut, the probability of a larger cut rose slightly on Thursday.

The latest inflation data signals confirmed bets that the Fed will cut rates next week, pushing Treasury ETFs to new highs.